The Effect of Changes in Tax Laws on Stock Liquidity: Evidence From the Tax Cuts and Jobs Act

Abstract

This paper investigates the effect of the Tax Cuts and Jobs Act of 2017 (TCJA) on stock liquidity. The TCJA brought significant changes, including a reduction in corporate tax rates and provisions incentivizing the repatriation of foreign earnings. We find a negative association between TCJA-related events and the liquidity of U.S. stocks, persisting even up to 60 days following legislative announcements. However, despite the negative impact on liquidity, there is evidence of improved price efficiency following the TCJA enactment, driven by increased informed trading. Additionally, our analysis extends to non-U.S. stocks traded in U.S. markets and indicates similar relations.